This week is the #StopFastTrack Week of Action, an attempt by the anti-globalization movement to coordinate protests around the world against the Trans-Pacific Partnership, a potential free trade agreement between the United States and 11 other Pacific Rim countries. The reason they’re doing it now is to influence lawmakers in the lead up to Congress’s lame duck session, during which many in Washington hope/​fear that Congress will vote on a bill to grant “trade promotion authority” (also known as “fast track”) to help the Obama administration complete the TPP negotiations.

Spearheading the effort is the AFL-CIO. In addition to asking supporters to call their member of Congress, the unions have also paid for ads at the DC metro station on Capitol Hill, obviously meant to reach congressional staffers during their commute.

Understandably considering the source, the ads have a very union-like feel to them. Lonely hardhats on the floor of a shuttered factory, middle-aged people lamenting that they’re not being paid enough, etc. Here’s a typical example showing a forlorn-looking young man who’s upset about income inequality:

The “1%” rhetoric should be quite familiar to most Americans by now as the standard jargon of the ideological left when they rail against all forms of voluntary commerce. It’s no surprise to see it employed by labor unions in their crusade against free trade. 

Organized labor’s opposition to trade is nothing new. So, in order to get more attention this year, labor groups have been readily pointing out that even some Republicans are opposed to fast track. In particular, they are referring to a soi-disant “tea party” group that claims fast track will enable “Obamatrade” to destroy American sovereignty and jobs. That group takes a very different approach with its messaging:

The news media have run with the narrative that a right-wing insurgency against fast track could threaten the U.S. trade agenda.

The problem with this narrative is that it is just wrong. Scott Lincicome and I have written a comprehensive take-down of the attempt by a tiny protectionist wing of the GOP to paint its anti-trade agenda as part of the tea party movement. Yes, there are conservatives who don’t like free trade, but the tea party movement is all about holding Republican members of Congress accountable when they stray from (most) limited government principles. As such, the members of Congress most associated with the tea party movement have the best records in support of free trade. 

Trying to get Republicans to oppose free trade by wearing a tri-corner hat and shrieking “OBAMA!!!” merely plays to the negative views of the tea party held by many in the news media.

There are real obstacles to liberalizing trade in the United States. The greatest obstacle is the inescapable reality that politicians benefit from rigging the system in favor of narrow constituencies seeking protection. Protectionists get ideological cover mostly from the anti-globalist left but also from the nationalist right. Thankfully, that nationalist impulse is largely in abeyance as a force against free trade in Congress at the moment, and “Obamatrade” notwithstanding, the tea party isn’t about to bring it back.

The U.S. Department of Commerce (DOC) announced Oct. 27 that it had reached draft agreements with Mexican sugar exporters and the Mexican government to suspend antidumping and countervailing duty (AD/CVD) investigations on imports of sugar from that country. Commerce has requested comments from interested parties by Nov. 10, with Nov. 26 indicated as the earliest date on which the final agreements could be signed. Given the obvious level of consultation by governments and industries on both sides of the border leading up to this announcement, it’s reasonable to presume that the agreements will enter into effect within a few weeks.

Suspension agreements that set aside the AD/CVD process in favor of a managed-trade arrangement are relatively rare. They sometimes are negotiated when the U.S. market requires some quantity of imports, and when the implementation of high AD/CVD duties would be expected to curtail trade severely. This would have been the case, assuming the duties actually had entered into effect. However, as this recent blog post indicates, it’s not at all clear that the U.S. International Trade Commission (ITC) would have determined that imports from Mexico were injuring the U.S. industry. A negative vote (a vote finding no injury) by the ITC would have ended these cases and left the U.S. market open to imports of Mexican sugar. 

What are the key provisions of the agreements? There are restrictions on both the price and quantity of imports from Mexico. Sugar will only be allowed to be imported into the United States if it is priced above certain levels: 20.75 cents per pound (at the plant in Mexico) for raw sugar, and 23.75 cents per pound for refined sugar. (For comparison, U.S. and world prices for raw sugar currently are about 26 cents and 16 cents, respectively; for refined sugar about 37 cents and 19 cents.) Additional price controls on individual Mexican exporters based on their alleged prior dumping (selling at a price the DOC determines to be less than fair value) will further raise the prices at which they will be allowed to sell.

Quantity restrictions on imports will be imposed through a formula related to supply and demand conditions in the U.S. market. A knowledgeable sugar industry analyst has calculated that Mexican exporters would be allowed to sell a minimum of approximately 1.3 million metric tons raw value (MMTRV) during the 2014–15 marketing year (Oct. 1, 2014 to Sept. 30, 2015). Depending on market conditions next spring and summer, that figure may rise to around 1.45 MMTRV. (Over the past seven years, imports from Mexico ranged between 0.629 MMTRV and 1.927 MMTRV.) No more than 60 percent of Mexico’s exports may be in the form of refined sugar. The timing of import arrivals will be controlled. Mexico will utilize export licenses to prevent more than 30 percent of its allowed sales from arriving in the United States during the October-December quarter, and no more than an additional 25 percent during January-March.

Since 2008 when NAFTA’s sugar provisions were fully implemented, there has been an open border for bilateral trade in sweeteners. Now that trade will be subject to a tightly controlled regime in which both governments will play important roles in making sure that market forces are not allowed to operate. 

Who are the likely winners and losers from this new arrangement? As might be expected, the U.S. sugar industry got pretty much everything it wanted. Both price and quantity will be constrained in ways that keep the U.S. market isolated from the world. U.S. growers can be expected to continue to enjoy artificially inflated earnings. 

Mexican growers got perhaps half of what they wanted. True, they have at least temporarily given up the open access to the U.S. sugar market that was negotiated under NAFTA. However, they have staved off what may have been the complete loss of their most important export market, in the event the ITC had ruled against them. They have obtained guaranteed access for slightly more than the quantity of sugar that had been exported to the United States on average in the seven years since NAFTA’s full implementation. And, as an additional benefit, the price restrictions imposed by the DOC will mean that they are likely to sell at higher prices in this managed market than would otherwise have been the case.

Officials in the U.S. Department of Agriculture (USDA) who run the sugar program also likely see themselves as benefitting from the suspension agreements. They have the rather unenviable task of trying to manage sugar supplies from all sources. This not only includes imports from the 41 countries that have rights to export sugar to the United States under the tariff-rate quota (TRQ) system. It also encompasses commercial deliveries of sugar produced by U.S. growers, who accepted marketing limits years ago in order to retain their high level of government price support. Up until now, the only unregulated source of supply to the U.S. sugar market has been imports from Mexico. Managers of the U.S. market may find it easier to maintain a tight enough balance between supply and demand to prevent the price from falling to the support level. Low domestic prices lead to costs for USDA, which no doubt generates flak for the people running the program. (Note: Making it easier for officials to supplant the invisible hand of the marketplace likely wouldn’t be seen as a good thing by the late free trader, Adam Smith.)

It’s not hard to identify losers from a tightly managed U.S. marketplace. Anyone who uses sugar is paying more for it than it is worth in the outside world. A press release by the Sweetener Users Association indicates their concerns that additional import restrictions will lead to greater market uncertainty and higher prices. Consumers can expect to pay hundreds of millions of extra dollars per year for sugar-containing products. This cost increase will act like a regressive tax. Low-income people will forfeit a higher percentage of their incomes to pay for this new consumption “tax” than will people with relatively higher incomes. (Will the White House criticize the deal because it leads to greater inequality?)

Another likely group of losers are U.S. producers and exporters of high-fructose corn syrup (HFCS). The United States generally is believed to be the world’s lowest-cost producer of HFCS, which has become the preferred sweetener for soft drinks and other liquid applications in North America. U.S. exports of HFCS to Mexico have risen more than three-fold since 2007 and recently have amounted to a million metric tons per year. (Liberalization under NAFTA has led to active sweetener trade in both directions.) The suspension agreement generates uncertainty for HFCS producers because sugar that otherwise would have been exported from Mexico to the United States now may stay south of the border and be used instead of HFCS in soft drinks. It would not be surprising to see a notable decline in HFCS exports in the coming years. 

On the other hand, Mexico had made clear its intention to retaliate in some form in the event AD/CVD duties were implemented against sugar, with HFCS being a likely target. (Note: Such retaliation likely would not be consistent with Mexico’s obligations under NAFTA and the WTO, but those commitments have not been much of a restraint in the past. The history of bilateral sweetener disputes provides ample evidence of Mexico’s ability to discriminate against imports of HFCS.) Thus, the U.S. HFCS industry may be hurt less by the suspension agreement than it would have been hurt by Mexico’s reaction to an adverse decision at the ITC. (Why is it that efficient industries often seem to suffer harm when governments try to protect inefficient industries?)

Of course, the U.S. and Mexican economies also will be losers under the settlement agreement. Both will tend to see scarce resources being allocated more poorly. GDP will be lower in each country, although minimally. Since the effects will be small, should we be concerned? The main concern is that this is one more among many policy choices in which the U.S. government has sided with special interests at the expense of the public interest. Could that be a reason that the economy has struggled to get back on its feet?

Which leads to the final loser: U.S. international trade policy. The United States currently is negotiating trade agreements including the Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership (TTIP), and (at least still in theory) the World Trade Organization (WTO) Doha Round. Does making a public statement to the effect that protecting U.S. sugar growers is the central organizing principle of U.S. trade policy do anything to strengthen the hand of U.S. negotiators? Hardly. Rather, the suspension agreement with Mexico likely will make it more difficult to persuade Japan to eliminate tariffs on its sensitive agricultural products. Our Canadian neighbors are being challenged in the TTP to end their highly restrictive dairy and poultry programs. What kind of message does the sugar suspension agreement send to them? It might be best if U.S. trade policy was simply to take two aspirin and go to bed until 2017.

Voters in Massachusetts, Georgia, Illinois, and elsewhere are being treated to a little 2012 redux, as desperate candidates try to paint their opponents with last election’s popular pejorative: “Outsourcer!” You may recall the accusations exchanged between President Obama and Mitt Romney two years ago, as each sought to portray the other as more guilty of perpetuating the “scourge” of outsourcing. At the time, I faulted Romney for running away from what I thought was his responsibility (as the businessman in the race) to explain why companies outsource in the first place, and how doing so benefits the economy and leads to better public policies. Had he done so, his explanation might have sounded something like this. 

For many people, the term outsourcing evokes factories shuttering in the industrial midwest only to be ressurrected in Mexico or China to produce the exact same output for export back to the United States. While a popular image of outsourcing, that particular rationale — to produce for export back to the United States — accounts for less than 10 percent of the value of U.S. direct investment abroad (as this paper describes in some detail). Over 90 percent of outward FDI is for the purpose of serving foreign goods and services markets and for performing value-added activities in conjunction with transnational production and supply chains. In most industries, it is difficult to succeed in foreign markets without some presence in those markets. And without success in foreign markets (where 95% of the world’s consumer’s reside), it is more difficult to succeed at home.

So, does “outsourcing” really deserve its bad reputation? Does it really hurt the U.S. economy? Well, the U.S. Bureau of Economic Analysis collects and compiles the kinds of data that can help us begin to answer these questions, including data about inward and outward foreign direct investment, and the activities of U.S. multinational corporations — both U.S. parents companies and their foreign subsidiaries. The scatterplots presented below reflect the relationships between annual changes in various performance metrics (value added, capital expenditures, R&D expenditures, sales revenues, employment, and compensation per employee) experienced by U.S. parent companies and their foreign affiliates. Each point on each plot represents a combination of the annual percent change for the affiliate (horizontal axis) and the parent (vertical axis) in a given year. 

If a foreign hire comes at the expense of a U.S. job, if ramping up production abroad means curtailing output at home, if a $100 million investment in a new production line or research center abroad means that plans for a new line or center in the United States get scrapped, if foreign outsourcing is as bad as its critics suggest, then we should expect to see an inverse relationship (at least not a direct or positive relationship) between the economic activities at U.S. parents and their foreign affiliates. We should expect to see most of the points in the upper-left or lower-right quadrants of the plots below.

The first plot shows annual changes in value added. The prevalance of observations in the upper-right quadrant indicates that in most years, value-added increased at foreign affiliates and their U.S. parents simultaneously, suggesting that U.S. and foreign activities of U.S. multinational are complements, not substitutes. That might be counterintuitive for some, but those more familiar with how multinational corporations operate can probably appreciate that production and sales activity on the foreign affiliates end often requires support from the parent company with respect to the provision of goods, supply chain logistics, finance, accounting, public relations, and various administrative functions. Increased activity abroad necessitates increased activity at home. Granted, the slope of the line running through those points is less than 45 degrees, which suggests slightly less than a one percent increase in value added at U.S. parents for every one percent increase of value added at their foreign affiliates. But this picture clearly refutes the notion of a zero-sum game, as value added increased for one group and decreased for the other in only 4 or 15 years.

The concern that U.S. MNC investment in factories or research centers abroad diverts investment from their U.S. operations should be put to rest by the data in the capital expenditures chart below. The positive relationship between capital expenditures abroad and at home is very strong, moving in the same direction for 12 of 15 years at approximately the same rate (the slope of the line is about 45%).  

Claims that outsourcing drains research and development dollars and activities from the United States get a little bit of support from the data below (6 years showing an inverse relationship and a slope suggesting a ratio of about a 5 percent increase at foreign affiliates for every one percent increase at parents). However, in 9 of 15 years, R&D expenditures increased at both affiliates and parents, suggesting that research and development spending is also complementary.

In 13 of 15 years, annual changes in sales revenue moved in the same direction — and positively for both affiliates and parents in 12 of those 13 years. These data suggest that sales by affiliates do not come at the expense of parents’ sales.

The idea that outsourcing amounts to “shipping jobs overseas” is not well supported by the employment figures, which indicate that in 9 of 15 years, employment changes moved in the same direction at parents and affiliates.

Finally, the compensation data also fail to support the negative characterizations associated with outsourcing. In 10 of 15 years, changes in the amount of compensation per worker moved in the same direction and, in fact, never once showed a decrease at U.S. parents.

Certainly, there are more data to consider and more layers of analysis to perform, but the metrics considered here suggest a lack of merit to to the adverse connections politicians, in particular, make between outsourcing and domestic economic conditions.

Mexican Economy Secretary Ildefonso Guajardo was in Washington this week arguing on behalf of an agreement to suspend the U.S. antidumping/​countervailing duty (AD/CVD) investigation against imports of sugar from Mexico. The case will soon enter its final phase, with the U.S. International Trade Commission (ITC) expected to determine early next year whether the U.S. sugar industry has been injured by imports from Mexico. 

In the context of North American sugar politics, an agreement to suspend the AD/CVD process and implement a managed-trade arrangement makes some sense. Both U.S. and Mexican sugar industries already are more or less wards of the state, or at least are very heavily guided and controlled by their respective governments. Both governments have given indications that they are interested in settling this dispute. The history of bilateral sugar trade has been dominated by government intervention rather than by free-market economics. It seems almost natural to take the next obvious step by allowing Mexican sugar to enter the United States only under terms of a suspension agreement (i.e., with the quantity limited or the price set high).

It’s worth mentioning that Mexican sugar growers are the only ones in the world currently allowed to sell as much sugar as they wish in the U.S. marketplace. Even U.S. growers are not permitted to do so. Years ago they gave up that right in exchange for retaining an almost embarrassingly high level of price support. That strong price incentive was inducing them to grow more sugar than the market could absorb. Under the provisions of the U.S. sugar program, that excess sugar could end up being owned by the U.S. Department of Agriculture at considerable expense to taxpayers. So U.S. sugar growers made the decision to sell less sugar, but keep the price high.

Mexican growers, on the other hand, obtained unfettered access to the U.S. market in 2008. That followed a contentious period of bilateral trade in sugar and high-fructose corn syrup (HFCS) dating to 1994, which was when the North American Free-Trade Agreement (NAFTA) began to be implemented. In a nutshell, the United States adopted a much more restrictive approach to imports of Mexican sugar than Mexico thought had been negotiated, and the Mexicans reciprocated regarding imports of HFCS. 

Given that historic context, the open access to the U.S. market enjoyed by the Mexicans since 2008 seems to be rather an anomaly. Why not go back to the good old days of closely managed trade? 

Two reasons occur to me. One is that Mexico negotiated its access to the U.S. sugar market in good faith during the NAFTA talks. The two countries each made concessions to the other and received benefits in return. The fact that the U.S. industry subsequently lobbied Congress for an excessively generous sugar program does nothing to change the commitment to keep imports from Mexico unrestricted. Within the construct of current U.S. sugar policy, the way for the United States to honor its international trade obligation would be to add further restrictions to sales of U.S. sugar in the U.S. market. (Or, of course, the U.S. sugar price support could be reduced or eliminated, which could obviate the need both for restrictions on sales of U.S. sugar and imports of Mexican sugar. That approach is far too market oriented for this industry, though.)

The other reason not to skip blithely back toward managed trade is that it’s not at all clear that the U.S. sugar industry will prevail in its AD/CVD case. I could explain that I served as an ITC commissioner for ten years and voted on several hundred AD/CVD cases. I have not discussed this investigation with current commissioners. (That wouldn’t be appropriate, and they wouldn’t tell me anything, anyway.) However, I have read the public version of key materials from the preliminary phase of the ITC investigation in some detail. The Commission voted 6–0 affirmative in favor of going forward to the final phase. This was not at all surprising; I would have voted with the majority. To vote in the negative would have required meeting a high standard: finding that there was no “reasonable indication that a domestic industry is materially injured or threatened with material injury.” There was not sufficient information on the preliminary record to make such a determination, which is the general rule in a complicated investigation such as this one. 

However, there was enough information to make me think that a negative vote in the final phase was entirely plausible. The legal standard is different in a final than in a preliminary. Instead of finding only a “reasonable indication” of material injury, the Commission actually has to determine that the domestic industry has been materially injured or is threatened with material injury. There also needs to be a clear causal link between imports from Mexico and any injury that the U.S. industry might have been experiencing. Yes, U.S. sugar prices fell during a portion of the period of investigation (POI), but world sugar prices also were falling. Did sugar imports from Mexico actually cause U.S. sugar prices to slide, or was the domestic market being driven down by the declining global price? (For more on these issues, see my previous post.)

There’s no doubt that there would be considerable risk for the Mexican government if it was to abandon efforts toward a suspension agreement and to focus solely on obtaining a negative vote from the ITC. If Mexico loses at the Commission, it would then be too late to negotiate a settlement. Rather, the U.S. industry would be in a relatively stronger position, with AD/CVD duties in place for the next five years. On the other hand, perhaps one or more Mexican producers would succeed in obtaining low or zero AD/CVD duties from the Department of Commerce. Such companies could continue to sell sugar profitably into the United States, potentially leaving the quantity of imports from Mexico unchanged from what it would have been otherwise. The larger the gap between the world price and the U.S. domestic price, the more likely this would be the case. If the next best alternative is to sell at a low price on the world market, paying a duty to sell into the United States might make good sense.

The upside to Mexico from achieving a negative vote at the ITC is really quite substantial. Not only would it retain the market access it paid for in the NAFTA, but its sugar industry also would be better positioned to grow and prosper.

From the standpoint of free traders, there could be another benefit. Knowing that imports from Mexico would continue to be present in the marketplace might help prompt the U.S. sugar industry to reconsider its protectionist policy instincts. Lowering the U.S. price support level would go a long way toward eliminating the artificial incentive that now draws Mexican sugar into the United States.

Last week the U.S. government settled a long-running trade dispute with Brazil, winning taxpayers the privilege of continuing to subsidize America’s wealthy cotton farmers in exchange for our commitment to subsidize Brazilian cotton farmers, as well. That’s right! We get to pay U.S. cotton farming businesses to overproduce, export, and suppress global prices to the detriment of Brazilian (and other countries’) cotton farmers provided that we compensate the Brazilians to the tune of $300 million.

Some background. Ten years ago, in a case brought by Brazil, the WTO Dispute Settlement Body ruled that the United States was exceeding its subsidy allowances for domestic cotton farmers and that it should bring its practices into compliance with the relevant WTO agreements. After delays and half-baked U.S. efforts to comply, Brazil sought and received permission from the WTO to retaliate (or, in WTO parlance, to “withdraw concessions” because opening one’s own market in a world of mercantilist reciprocity is, perversely, considered a cost or concession). Under the threat of such retaliation, instead of bringing its cotton subsidies into WTO compliance, the U.S. government agreed to pay $147 million per year to Brazilian farmers so that it could continue subsidizing U.S. farmers beyond agreed limits. That arrangement prevailed for a few years until the funds were cut during the budget sequester earlier this year – an event that triggered a renewed threat of retaliation from Brazil, which now has been averted on account of last week’s $300 million settlement.

The Peterson Institute’s Gary Hufbauer characterized the agreement as a “good deal” because it ends the specter of soured bilateral relations, which $800 million of targeted retaliation against U.S. exporters and intellectual property holders would likely produce, for a reasonable price of $300 million “spread widely across the US population, around 90 cents a person.” In Hufbauer’s opinion:

Money damages, paid in this way, are much fairer, and do not destroy the benefits of international commerce, unlike concentrated retaliation against firms that had nothing to do with the original dispute. The WTO system is only designed to authorize such retaliation, but the US-Brazil settlement points the way towards a better way of satisfying breaches of WTO obligations.

While I share Hufbauer’s desire to avoid retaliation and soured relations, his rationale for endorsing the settlement seems a bit strained. If the settlement is justifiable because the costs are spread across 300-plus million Americans, then Hufbauer can probably lend his support to most subsidies, tariffs, and other forms of protectionism, which endure because the concentrated benefits accruing to the favor-seekers are paid through costs imposed, often imperceptibly, on a diffuse base of unorganized consumers or taxpayers. Does the smallness or the imperceptibility of the costs make it right? No, but it makes it easy to get away with, which is why I think it’s pennywise and pound foolish to endorse such outcomes. There are all sorts of federal subsidies to industries and tariffs on goods that may be small or imperceptible as a cost on a standalone basis at the individual level. But when aggregated across programs, the costs to individuals become more significant. It’s death by 10,000 cuts.

Hufbauer implies that $0.90 per American is not an unreasonable amount. Does he have a threshold per-person cost above which he would consider the burden unjustified? As it stands now, the cost to taxpayers is well in excess of the $0.90 — a figure that accounts only for the subsidies to the Brazilians. We know that the U.S. subsidies are approximately $800 million in excess of allowance, which means that the violating portion of taxpayer subsidies to cotton producers amounts to $2.40 per American. For the “right” to spend that $2.40 per American, each American must spend $0.90 for a total of $3.30 each. So, instead of saving $2.40 per American by bringing subsidies into compliance, taxpayers are in the red by $3.30 each — a $5.70 reversal. But, of course, the real cost to Americans is not the excess subsidies plus the cost of subsidizing Brazilians, but the overall cost of cotton subsidies, which were close to $2 billion per year for the period 1995–2012, or over $6.00 per American per year during that period. But why should Americans be forced to support wealthy U.S. cotton farmers in the first place?

Hufbauer’s point is that money damages spread over a broad base of payers is more fair than targeted retaliation, which would impose those costs on a few innocent U.S. industries and IP holders, and he writes that “the WTO system is only designed to authorize” such retaliation. But I think Hufbauer is selling the system short. Compliance with the rules is preferable to both targeted retaliation and damages spread across a broad base, and the WTO system is designed to encourage such compliance without imposing on national sovereignty.

First of all, retaliatory trade measures are something most governments prefer to avoid because trade restrictions hurt businesses and consumers in the country imposing them. But the purpose of permitting a WTO member to withdraw concessions in response to another Member’s violations and persistent non-compliance is, ultimately, to encourage compliance by bringing otherwise dormant domestic pressures to bear on the offending government. The threat of retaliation along with publication of a target list essentially broadens the dispute by creating more stakeholders — specifically, domestic stakeholders with an interest in compliance. In 2002, when the United States imposed restrictions on steel imports from most countries, which were found to violate the WTO Safeguards Agreement, the EU’s retaliation list included products known to be important to organized lobbies or states with particular relevance to congressional and presidential electoral outcomes — products such as citrus, textiles, and motorcycles. The credible threat of retaliation against these and other industries created a powerful political constituency encouraging compliance with the WTO ruling by ending the steel restrictions, which also brought U.S. producers and consumers the benefits of lower steel prices.

In the cotton case, instead of achieving compliance and reducing burdens on U.S. taxpayers, the targets of Brazilian retaliation managed to get themselves out of harm’s way, but at the expense of U.S. taxpayers. Any leverage to compel the U.S. government to do the right thing and rein in the cotton subsidies has been spent. Hufbauer’s outlook differs:

Brazil’s agreement to drop its WTO case against US cotton subsidies (specifically an export credit program known as GSM-102) and not to launch a new case expires at the same time that the US Agricultural Act of 2014 expires in 2018. What this means is that the US Congress in 2018 will face pressure not to renew a subsidy program that enriches a few already rich American farmers.

The problem with that logic is that the same “pressure” existed this year, before Congress passed the farm bill. Yet, the Agricultural Act of 2014 includes the same offensive provisions for cotton. Moreover, what incentives exist for Congress “not to renew a subsidy program that enriches a few already rich American farmers” if the price of buying four more years of peace is a comparably reasonable $0.90 per person?”

Settlements like these may appease the primary governments involved in the dispute, but they leave unresolved the original sins, which impose a lot of collateral damage on a variety of interests. In that regard, settlements are failures.

Finally, if the cotton settlement and the tobacco settlement (the latter is described by Bill Watson here today) — which both, essentially, release the United States from its WTO commitments in exchange for some form of payment to the complainant — are portrayed as trade policy successes, it will be just a matter of time before WTO adjudication devolves into a claims court before descending into irrelevance.

The World Trade Organization’s judicial body determined over two years ago that a U.S. law banning clove cigarettes while leaving domestically produced menthols on the shelf was protectionist discrimination. Now the U.S. and Indonesian governments have reached a “settlement” in which Indonesia agrees to drop the case in exchange for nothing.

Technically, the settlement, as reported, includes a few promises from the United States, but these are so weak as to be practically meaningless. For example, the United States agrees to refrain from “arbitrary discrimination” against Indonesian cigars (which is already not allowed) and to “postpone” filing its own case against Indonesian export restrictions (which no longer impact U.S. companies).

American refusal to comply with global trade rules against regulatory protectionism is both unfortunate and, in this case, unsurprising. There were two basic ways that the U.S. government could have come into compliance: 1) by dropping the ban on cloves, or 2) by extending the ban to menthols. Neither of those options was politically feasible, so the United States did nothing.

Normally, the WTO dispute settlement process can be very helpful in overcoming political barriers to trade liberalization. When one country loses a case at the WTO and fails to comply, the complaining country has the right to retaliate by raising tariffs on goods from the losing country. This creates concentrated losses that have much greater political impact than the generally diffuse costs of protectionist policies. The ultimate goal is to “induce compliance”—the losing country discontinues its offending practice so that the retaliation will stop. 

But the United States is very big and powerful, so that for most countries cutting off imports from the United States is not only ineffective at swaying Washington policymakers but also very harmful to their own economy. Indonesia appears to have decided that dropping the case and walking away makes more sense than continuing to press forward with costly, futile retaliation.

Unfortunately, the clove cigarette settlement joins a growing list of similar cases in which the United States has taken advantage of its economic and political power to avoid complying with WTO rules. These include a successful challenge by the tiny island nation of Antigua against U.S. restrictions on cross-border online gambling that Antigua has no way to enforce. 

Perhaps the most embarrassing example of noncompliance is the deal between the United States and Brazil reached after Brazil won a case against U.S. cotton subsidies. The United States managed to avoid retaliation and keep the subsidies by agreeing to send Brazilian cotton farmers a check for $147 million every year. That arrangement appears to be coming to an end with the United States providing one final payment of $300 million and keeping the cotton subsidies indefinitely.

The United States doesn’t always refuse to comply with WTO decisions. The threat of retaliation from Canada and Mexico may very well make a difference in the ongoing fight over protectionist U.S. regulations related to origin labels for meat. A big difference between that case and clove cigarettes is that Canada and Mexico are the two largest export markets for U.S. products. 

There’s reason for optimism, but the reputation of the WTO dispute settlement process is being put at serious risk by this administration’s lack of commitment to the rules of the international trading system.

In a recent opinion piece, Washington Post columnist Harold Meyerson criticized something called the “investor-state dispute settlement” (ISDS) mechanism, which is included in some trade agreements. My colleague Dan Ikenson responded here; I wrote a letter to the Post, which said:

Harold Meyerson made valid points about the Investor-State Dispute Settlement (ISDS) clause in trade agreements in his Oct. 2 op-ed column, “A flawed trade clause.” However, with all the misinformation that exists on this issue, it is important to be precise. Foreign investors cannot sue “over any rules, regulations or changes in policy that they say harm their financial interests.”

Rather, they can sue if the host government has discriminated against an investor because it is foreign; if an investment has been expropriated, either directly or indirectly; or if the investor has experienced bad treatment of a more general sort (this controversial standard is known as “fair and equitable” treatment).

In a sense, the ISDS provision creates international judicial review of national laws and regulations, with such review available only to foreign investors. That is certainly a controversial proposition, but it is important to keep the debate focused on the facts, rather than on myths that have been put forward.

You only get so much space for these letters, so I thought I’d elaborate here.

ISDS allows foreign investors to challenge any and all domestic government actions before an international tribunal. That includes local, state, and national measures, by legislators, regulators, or courts. In terms of the substance of the claims that can be made, they look a lot like certain constitutional doctrines: Equal Protection, Takings, and Due Process. What you end up with, in effect, is a special international “constitutional” court (of sorts), available only to foreign investors. (It can’t strike down the domestic laws, of course, but it can award damages for violations.)

I’ve been very skeptical of this. I don’t want to go through all the arguments, but let me raise three three critical points about ISDS:

• If we’re going to have this kind of international judicial review, why give it only to foreign investors? Why not oppressed minorities? It doesn’t look very good when you protect the rights of only the rich.
• If we’re going to have international judicial review, shouldn’t we debate it more explicitly? It’s kind of a big deal. But when Congress and the Administration talk about issues related to these foreign investment rules, they don’t mention this aspect of it.
• Some libertarian-ish people I’ve talked to see this procedure as another valuable check on excessive government actions. I’m not convinced. Sure, ISDS could be used to argue that the government has over-reached. But it could also be used to get the government to reach further. The “fair and equitable” treatment clause in particular offers the scope to argue that the government should do more. For example, companies who receive renewable energy subsidies have [$] sued or threatened to sue when governments try to cut back on those subsidies. Thus, it can also be used to get in the way of sensible, more limited government.